With the passage of the new tax law, we now have more certainty regarding what to expect for 2018. Although there are only ten days left in 2017, you may still have time to take action in order to take advantage of certain provisions before they expire.
It should be understood that nearly all the Act’s provisions which apply to individuals will expire in 2025. Unless it is extended prior to that time or permanent changes are made, the law, as it stands today will once again apply in 2026. Thus, any tax decrease that you receive as a result of the new tax law may only be temporary.
All the implications of the Act with regard to corporations, which are substantial, are not part of this summary. However, I will say that the corporate income tax rate drops by 14% (from 35% to 21%). As opposed to the provisions for individuals, the new tax law is permanent for corporations. Unless the law is changed their tax decrease will be in effect after 2025.
DEFERRAL OF INCOME
Although Congress had promised only three or four income tax brackets, the new Act keeps seven brackets. However, the tax rate for most individuals will be slightly lower in 2018 than it was in 2017. Use the table below to determine the effect the law’s change will have on your situation. If you anticipate that your income tax rate in 2018 will be lower than your current rate, then defer as much income as possible from 2017 into 2018.
Deferring income will be difficult if you are an employee, but if you are anticipating a bonus, ask about receiving it in 2018. If you are self-employed defer billing until the end of the year so that amounts are received in 2018. If you are an accrual method taxpayer, deferring the income may be more difficult to do regardless of your employment status.
INCOME MARRIED SINGLE TAX RATE
Long term capital gains and qualified dividend rates were not changed by the new law.
The new tax law increases the standard deduction to $12,000 for single taxpayers and $24,000 for married taxpayers. Personal exemptions have been eliminated. For taxpayers who wish to itemize deductions in 2018 instead of taking the new standard deduction the law has made changes to itemized deductions. Specifically:
Sales tax, real estate taxes and state/local income taxes, for those states that have income tax will be capped, at a TOTAL of $10,000.
If you are planning to purchase a large item (for example, an automobile) which will generate a large amount of sales tax consider making the purchase in 2017 and not 2018. This way you will be able to deduct the full amount of the sales taxes incurred in 2017.
In Florida, real estate taxes are generally due on May 1. Consider pre-paying all property taxes in 2017 to take advantage of the deduction for property taxes. While Congress provided that state income taxes due in 2018 could not be pre-paid in order to generate a 2017 deduction, it said nothing about property taxes.
Charitable deductions are not affected by the law. However, itemization only makes sense if doing so provides a higher benefit that the standard deduction. With the increase in the standard deduction, the caps on deductions (see above) and the repeal of other deductions (see below) charitable contributions may not provide much of a tax benefit in the future.
If you are planning to make charitable gifts, make them in 2017 in order to take advantage of the deduction.
Home mortgage interest deductions will still be allowed. However, the current $1,000,000 of allowed indebtedness will be lowered to $750,000 starting in 2018. Hence if you are planning to buy that luxury home and anticipate a mortgage of over $750,000 you will not be able to deduct all the interest paid on the loan. If you are close to making a deal on the home, close on the deal by December 31, 2017. By doing so you will be able to deduct interest on up to $1,000,000 of indebtedness.
Interest deductions on home equity loans will no longer be allowed starting in 2018.
Deductions for employee business expenses, moving expenses, entertainment expenses incurred in carrying on a business, tax preparation fees, and investment advisory fees have been repealed by the act. If you anticipate incurring any of these expenses, try pay for them in 2017 to take advantage of the deduction.
The tax-free reimbursement of employee moving expenses has also been repealed. If you are relocating as a result of a job and your new employer is reimbursing you for moving expenses, make sure you receive the reimbursement in 2017.
Currently, alimony payments are deductible by the paying spouse, and are income to the spouse receiving the alimony. For all divorces finalized after December 31, 2018, alimony will no longer be deductible by the paying spouse nor will it be income to the receiving spouse.
The exemption for the alternative minimum tax has been increased. Consideration should be given to postponing to 2018 any transactions which would give rise to the application of the ATM to take advantage of the higher exemption amount.
Although there is much more to the new tax law that what is discussed herein, the above changes should be taken into consideration now. Doing so may enable you to take steps in the final days of 2017 which may reduce your tax obligation for 2017.